The Square Foot

Asian pensions’ real estate investment

Dr. Graeme Newell, a professor at the University of Western Sydney, has just completed the second tranche of a multi-staged research assignment commissioned by the Asia Pacific Real Estate Association on the “Significance of Real Estate in Asian Pension Fund Portfolios.” The first report from the study was completed and first presented at a first annual VIP – Asia Investor Roundtable in Singapore, held in 2010. A copy of that original report can be obtained from APREA.

The results of phase two of the study were just presented on Nov. 20, 2013, at the fourth annual VIP – Asia Investor Roundtable, held at the J.W. Marriott in Hong Kong. The final written report from this study will soon be available from APREA. Meanwhile, the following are just a few of the highlights from Dr. Newell’s most recent presentation.

The results of the first study completed in 2010 captured the mood of Asian pension funds and their need to start diversifying their portfolios away from their, at the time, decidedly fixed-income orientation. This year’s study focused on momentum — the considerable progress that has been made by some of Asia’s largest pension funds to actually begin that diversification process.

Pension funds in general have become an increasingly important source of capital for the real estate markets. World pension assets now stand at more than $30 trillion, and for many large pension funds, real estate allocations typically are in the 5 percent to 10 percent range.

Asian pension funds include five of the top 10, 10 of the top 50, and 29 of the top 300 largest pension funds in the world.

The largest of these is the Government Pension Investment Fund of Japan, with $1.292 trillion in assets under management. GPIF is the largest pension fund in the world today.

The second largest in the Asian region is the National Pension Service of South Korea, with $368 billion in assets. NPS is the fourth-largest pension fund in the world.

The Local Government Pension Plan of Japan is the third largest in the region, with $201 billion in assets. It is the world’s seventh-largest pension fund

The Central Provident Pension Fund of Singapore is the fourth largest in the region, with $188 billion in assets; it is the world’s eighth-largest pension fund.

The National Social Security System of China is the fifth largest in the region, with $177 billion in assets; it is the 10th-largest pension system in the world.

The sixth largest fund in the region — the Employees Provident Fund of Malaysia — is the world’s 12th-largest fund, with $176 billion in assets.

But many if not most of these Asian pension funds still have relatively conservative asset allocation mixes in their portfolios, with a decidedly undue over-concentration in fixed-income securities.

Because of the over-reliance on fixed-income securities in their portfolios, it will be incredibly difficult if not impossible for most of these funds to finance their future pension fund liabilities, particularly in light of today’s low interest rate environment.

The current asset mix of the GPIF of Japan includes 60 percent domestic bonds, 10 percent international bonds, 16 percent domestic stocks, 13 percent international stocks and 1 percent in short-term investments, with zero allocated to alternatives, which means, zero allocated to real estate. This kind of asset mix is typical for many Asia pension funds.

In contrast, South Korea’s NPS has 63 percent of its assets in domestic fixed-income securities, 5 percent in international bonds, 17 percent in domestic equity securities, 7 percent in international stocks and 8 percent in alternatives, including real estate. So while the NPS is much better diversified than funds such as the GPIF, it still has a very high exposure to the fixed-income markets.

The EPF of Malaysia has 55 percent of its assets in bonds, 38 percent in stocks, 4 percent in money market funds and the remaining 3 percent in real estate and infrastructure investments.

The $29 billion KWAP of Malaysia has 54 percent in domestic fixed income, 2 percent in international fixed income, 30 percent in domestic stocks, 2 percent in international stocks, 9 percent in money market funds and the remaining 3 percent in real estate.

The $19 billion GPF of Thailand has 62 percent in domestic fixed income, 10 percent in international fixed income, 8 percent in domestic stocks, 8 percent in international stocks, 1 percent in commodities and the remaining 11 percent in alternative assets, including real estate.

Pension reform is obviously needed in Asia, and in many regions, it is ongoing. The drivers of this reform:

Demographics (aging populations)

Urbanization (more workers covered by plans)

Costs and deficiencies in funding

Growing nature of future liabilities

Financial market and regulatory reforms

Changing asset allocations

Demographic forces — the aging of the population — is having a rapid and immense impact on policy decision making:

Today in China, there are 9 people working for every single individual in retirement; by 2050, there will be 3 people working for every single individual in retirement.

In Hong Kong, today there are 6; by 2050 there will be 2.

In India, today there are 13; by 2050 there will be 5.

In Japan, today there are 3; by 2050, there will be 1.

In Singapore, today there are 7; by 2050 there will be 2.

In South Korea, today there are 6; by 2050 there will be 2.

In Taiwan, today there are 7; by 2050 there will be 2.

In Thailand, today there are 9; by 2050 there will be 4.

In Malaysia, today there are 14; by 2050 there will be 4.

In the Philippines, today there are 14; by 2050 there will be 5.

In Indonesia, today there are 11; by 2050 there will be 4.

By way of contrast, in the OECD countries, today there are 4 people working for every retired person; by 2050 there will be 3.

Collectively, the Asian pension funds surveyed in the study control in aggregate more than $792 billion in total assets under management, of which $30 billion, or roughly 3.8 percent, is invested in real estate.

Were the Asian pension funds sampled in the survey to increase their real estate allocations to the 5 percent to 10 percent range common among their Western pension fund peer group, it would create the potential for an additional $9.6 billion to $49.2 billion of additional real estate investments. Asian pension funds are growing at a relatively fast rate, so the amount of real estate investment potential these funds represent is considerably greater than that number.

Different strategic considerations for plans with larger versus smaller AUM

Other challenges

If you are interested in purchasing a copy of the final report of this survey, keep an eye on the APREA website. Dr. Newell indicated at the close of his presentation at VIP that APREA’s goal is to have the report available for sale and distribution by Christmas 2013.

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